Banks yet to ease credit flow to finance firms

Funds being used to meet working capital needs: Bankers.

Non-banking finance companies (NBFCs) are still complaining about the lack of liquidity as banks continue to be reluctant to lend.

Executives in various finance companies said that banks are charging around 13 per cent for funds made available to them. As a result, the cost of lending has been pushed up to 15 per cent or more, making their business model unviable.

Raising funds from the markets is also not easy for NBFCs as investors are wary of parking their cash with these companies. On their part, banks have a different story to tell. They admit that the flow of credit has picked up only marginally as the perception about the sector is not too bullish, given the legacy assets that NBFCs have.

A senior banker said that the monthly reports and analysis of loan books of the NBFCs, which began in October, does not paint a very healthy picture. Since October, banks have stepped up monitoring of NBFCs before sanctioning loans.

These entities are required to produce a certificate from an independent auditor appointed by the bank, authenticating the purpose of the loans. The auditors have also been asked keep tabs on regular fund flow and report to the bank on a monthly basis.

“NBFCs, which are into multiple products, are still perceived to be risky. Hence, the interest rate will be on the higher side. They are asked to produce auditor certificate to keep tab on the end use of funds,” said a senior public sector bank executive.

Bankers also said that the funds raised by NBFCs are not being used for fresh lending and are instead used to meet working capital requirements. “If the loans raised from us are not used for sanctioning assistance, then it may not be prudent to lend. Also, it points to poor cash flows for NBFCs,” said a source.

On their part, NBFCs admitted that lending by them is yet to pick up in a big way. “Most banks have become a bit more liberal while lending to the sector but NBFCs are just rolling over their credit lines. There are no fresh disbursals,” said Reliance Capital Chief Executive Officer Sam Ghosh.

“Everyone is holding back their expansion plans, as the market will take time to recover. As of now, we need funds mainly to meet our working capital needs,” added another NBFC chief.

In addition, bankers said that NBFCs focused on lending to the commercial vehicles and real estate segment are seeing deterioration in their asset quality as a large number vehicles are off the roads due to the economic slump. The real estate sector is under pressure as the demand has come down in recent months and builders are yet to get rid of the inventory.

“The analysis of loan books of some retail financing NBFCs shows that the asset quality is not good and thereby the probability of defaults is pretty high,” said a public sector bank executive.

Since October, when the global credit crisis intensified, the Reserve Bank of India (RBI) has reduced the cash reserve ratio by 400 basis points to enhance liquidity in the system. In addition, the repo rate — or the rate at which RBI lends to banks — has been lowered by 350 basis points.

To make it unattractive for banks to park surplus cash with RBI, the reverse repo rate has also been pared by 200 basis points in addition to a host of other measures initiated by the government and the central bank to make funds available to all sectors, including NBFCs.

A new liquidity enhancement system for NBFCs is also being finalised, which will help them raise up to Rs 25,000 crore by offering commercial paper as collateral.